{"id":10068,"date":"2025-04-28T17:15:52","date_gmt":"2025-04-28T17:15:52","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=10068"},"modified":"2025-04-28T17:16:29","modified_gmt":"2025-04-28T17:16:29","slug":"not-all-selloffs-are-the-same-do-you-know-which-one-were-in","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/not-all-selloffs-are-the-same-do-you-know-which-one-were-in\/","title":{"rendered":"Not All Selloffs Are the Same\u2014Do You Know Which One We&#8217;re In?"},"content":{"rendered":"\n<p><strong>Categorizing a Market Selloff Can Help You Navigate It<\/strong><\/p>\n\n\n\n<p>Market declines come in all shapes and sizes, but they tend to follow similar patterns over time. Corrections are short, sharp declines between -10% and -20%, while bear markets are declines greater than 20% that fall into one of three categories<sup>1<\/sup>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Structural \u2013 <\/strong>These bear markets are caused by severe dislocations, typically in financial markets, and are often associated with \u2018bubbles.\u2019 The 2008 Global Financial Crisis is an example of a structural bear, which often take several years to fully recover from.<\/li>\n\n\n\n<li><strong>Cyclical \u2013 <\/strong>These bear markets are more closely tied to the business cycle, and often coincide with a peak in profit margins, rising interest rates, elevated inflation, and\/or a deceleration in economic growth.<\/li>\n\n\n\n<li><strong>Event-Driven \u2013 <\/strong>Event-driven bear markets are triggered by an extraneous, usually unexpected shock. The Covid-19 pandemic is a perfect example of an event-driven bear market, as investors quickly anticipate immediate and elevated risks to earnings and growth.<\/li>\n<\/ul>\n\n\n\n<p>In terms of magnitude and duration, structural bear markets tend to be the most painful. They\u2019ve averaged about -37% declines over approximately 42 months. Cyclical and event-driven bear markets, on the other hand, average about -30% declines over generally shorter periods. Cyclical bears have lasted 25 months on average, while event-driven bears have usually spanned about 8 months with an average drawdown of -29%. &nbsp;<\/p>\n\n\n\n<p>In my view, the current environment has the markings of a correction or an event-driven bear market. &nbsp;<\/p>\n\n\n\n<p>The stock market appears to be very quickly pricing-in uncertainty tied to tariffs and other political factors, which has led to multiple contractions even as earnings have, to date, held up reasonably well. I\u2019m not seeing any signs of a bubble bursting or a crisis in financial markets, which I think easily rules out a structural bear. A cyclical bear market does not seem likely either, as interest rates and inflation peaked some time ago and earnings expectations for 2025 were nicely positive throughout Q1. Higher-than-expected tariff pronouncements\u2014with all the accompanying uncertainty\u2014have been the wild card, which I think puts this downdraft in the event-driven category.&nbsp;<\/p>\n\n\n\n<p>As seen in the table below, event-driven bear markets can sometimes have the look and feel of corrections, given the very short time frame where downside volatility is experienced. Once the downdraft is over, the forward returns are unanimously positive.<\/p>\n\n\n\n<p><strong><em>Bear Markets and Recoveries, 1929 &#8211; Present<\/em><\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td>Type<\/td><td>Market Peak<\/td><td>Market Trough<\/td><td>Peak-to-Trough Decline (%)<\/td><td>1-Month (%)<\/td><td>6-Month (%)<\/td><td>1-Year (%)<\/td><td>2-Year (%)<\/td><td>5-Year (%)<\/td><td>10-Year (%)<\/td><\/tr><tr><td>Structural<\/td><td>9\/16\/1929<\/td><td>6\/1\/1932<\/td><td>-86.2<\/td><td>4.5<\/td><td>53.0<\/td><td>121.4<\/td><td>113.2<\/td><td>251.6<\/td><td>110.9<\/td><\/tr><tr><td>Structural<\/td><td>3\/10\/1937<\/td><td>4\/28\/1942<\/td><td>-60.0<\/td><td>9.5<\/td><td>24.6<\/td><td>53.7<\/td><td>58.9<\/td><td>92.0<\/td><td>223.0<\/td><\/tr><tr><td>Cyclical<\/td><td>5\/29\/1946<\/td><td>5\/19\/1947<\/td><td>-28.5<\/td><td>9.9<\/td><td>11.4<\/td><td>18.9<\/td><td>7.5<\/td><td>78.0<\/td><td>189.1<\/td><\/tr><tr><td>Event<\/td><td>8\/2\/1956<\/td><td>10\/22\/1957<\/td><td>-21.6<\/td><td>4.8<\/td><td>9.8<\/td><td>31.0<\/td><td>43.7<\/td><td>56.0<\/td><td>144.5<\/td><\/tr><tr><td>Event<\/td><td>12\/12\/1961<\/td><td>6\/26\/1962<\/td><td>-28.0<\/td><td>8.5<\/td><td>20.5<\/td><td>32.7<\/td><td>55.7<\/td><td>79.8<\/td><td>122.3<\/td><\/tr><tr><td>Event<\/td><td>2\/9\/1966<\/td><td>10\/7\/1966<\/td><td>-22.2<\/td><td>10.3<\/td><td>22.1<\/td><td>32.9<\/td><td>41.7<\/td><td>29.0<\/td><td>34.4<\/td><\/tr><tr><td>Cyclical<\/td><td>11\/29\/1968<\/td><td>5\/26\/1970<\/td><td>-36.1<\/td><td>6.0<\/td><td>22.8<\/td><td>43.7<\/td><td>59.7<\/td><td>36.8<\/td><td>102.3<\/td><\/tr><tr><td>Structural<\/td><td>1\/11\/1973<\/td><td>10\/3\/1974<\/td><td>-48.2<\/td><td>18.6<\/td><td>30.9<\/td><td>38.0<\/td><td>67.3<\/td><td>64.6<\/td><td>187.6<\/td><\/tr><tr><td>Cyclical<\/td><td>11\/28\/1980<\/td><td>8\/12\/1982<\/td><td>-27.1<\/td><td>18.1<\/td><td>44.1<\/td><td>58.3<\/td><td>61.5<\/td><td>214.4<\/td><td>334.1<\/td><\/tr><tr><td>Event<\/td><td>8\/25\/1987<\/td><td>12\/4\/1987<\/td><td>-33.5<\/td><td>14.3<\/td><td>19.0<\/td><td>21.4<\/td><td>56.9<\/td><td>94.4<\/td><td>388.9<\/td><\/tr><tr><td>Cyclical<\/td><td>7\/16\/1990<\/td><td>10\/11\/1990<\/td><td>-19.9<\/td><td>6.2<\/td><td>27.8<\/td><td>29.1<\/td><td>36.3<\/td><td>100.6<\/td><td>294.6<\/td><\/tr><tr><td>Structural<\/td><td>3\/24\/2000<\/td><td>10\/9\/2002<\/td><td>-49.1<\/td><td>15.2<\/td><td>11.5<\/td><td>33.7<\/td><td>44.5<\/td><td>87.1<\/td><td>101.9<\/td><\/tr><tr><td>Structural<\/td><td>10\/9\/2007<\/td><td>3\/9\/2009<\/td><td>-56.8<\/td><td>26.6<\/td><td>52.7<\/td><td>68.6<\/td><td>95.1<\/td><td>176.7<\/td><td>340.3<\/td><\/tr><tr><td>Event<\/td><td>2\/19\/2020<\/td><td>3\/23\/2020<\/td><td>-33.9<\/td><td>25.0<\/td><td>44.7<\/td><td>74.8<\/td><td>99.2<\/td><td>106.4<\/td><td>198.0<\/td><\/tr><tr><td>Cyclical<\/td><td>1\/03\/2022<\/td><td>10\/12\/2022<\/td><td>-25.4<\/td><td>11.6<\/td><td>14.4<\/td><td>21.6<\/td><td>62.6<\/td><td>NA<\/td><td>NA<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>It makes sense why the recovery from event-driven downdrafts is often quick. In many cases, the global\/U.S. economy is in decent or good shape before an exogenous event takes place, meaning that it does not take quite as long for the economy to recover once the impact of the \u2018event\u2019 fades. In the current environment, if trade uncertainty suddenly fades it would be easy to envision the market taking off in response. U.S. household and corporate balance sheets are strong, the jobs market remains in strong overall shape, and credit spreads are tight. Investment-grade corporations still have relatively easy access to capital markets, and banks are also very well capitalized. This calls for patience, in my view.<\/p>\n\n\n\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n\n\n\n<p>There is no way to know when the market will bottom. But what I can tell you, from a long reading of history, is that <em>a sustained market rally will almost certainly take hold as the news remains bad and even gets worse<\/em>. In other words, don\u2019t wait for the breakthrough in trade. The goal now is to ensure you\u2019re positioned to participate in the rebound when it occurs. If this is a correction or an event-driven bear market, which I believe it is, that rebound could arrive much sooner than many anticipate.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>From corrections to extended bear markets, market declines come in all shapes and sizes.<br \/>\nUnderstanding which type we&#8217;re in can help you get through it best<\/p>\n","protected":false},"author":4,"featured_media":9971,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-10068","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/10068","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=10068"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/10068\/revisions"}],"predecessor-version":[{"id":10070,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/10068\/revisions\/10070"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media\/9971"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=10068"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=10068"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=10068"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}